UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 (Mark One)

 

 or

.	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                      to

 

Commission file number: 000-05663

 

LIBERATOR MEDICAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

NEVADA (State or other jurisdiction of incorporation or organization)		87-0267292 (I.R.S. Employer Identification No.)

 

2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices) (Zip Code)

 

(772) 287-2414
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   X .   No       .  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   X .   No       .  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes       .   No   X .  

 

APPLICABLE TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding as of May 10, 2014
Common Stock, $.001		52,813,709

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TABLE OF CONTENTS

 

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	19
Item 4.	Controls and Procedures	19
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
SIGNATURES		21

 

 

 

2

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PART I — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
As of March 31, 2014 (unaudited) and September 30, 2013
(In thousands, except dollar per share amounts)

 

 

See accompanying notes to unaudited condensed consolidated financial statements. 

3

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Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three and six months ended March 31, 2014 and 2013
(Unaudited)
(in thousands, except per share amounts)

 

		Three Months Ended March 31,								Six Months Ended March 31,
		2014				2013				2014				2013
Net Sales		$	17,619			$	16,734			$	36,256			$	34,285
Cost of Sales			6,611				6,000				13,493				12,574
Gross Profit			11,008				10,734				22,763				21,711
Operating Expenses
Payroll, taxes and benefits			3,681				3,666				7,338				7,509
Advertising			2,371				2,269				4,697				4,471
Bad debts			818				1,167				1,642				2,445
Depreciation and amortization			168				174				339				338
General and administrative			1,373				1,100				2,650				2,332
Total Operating Expenses			8,411				8,376				16,666				17,095
Income from Operations			2,597				2,358				6,097				4,616
Other Expenses			(13)				(21)				(26)				(42)
Income before Income Taxes			2,584				2,337				6,071				4,574
Provision for Income Taxes			971				917				2,338				1,802
Net Income		$	1,613			$	1,420			$	3,733			$	2,772
Basic earnings per share:
Weighted average shares outstanding			52,578				48,177				52,467				48,162
Earnings per share		$	0.03			$	0.03			$	0.07			$	0.06
Diluted earnings per share:
Weighted average shares outstanding			53,602				52,277				53,450				52,214
Earnings per share		$	0.03			$	0.03			$	0.07			$	0.05
Dividends declared per common share		$	0.03				—			$	0.06				—

 

See accompanying notes to unaudited condensed consolidated financial statements.

4

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Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the six months ended March 31, 2014
(Unaudited)
(in thousands)

 

									Additional												Total
	Common Stock								Paid in				Accumulated				Treasury				Stockholders’
	Shares				Amount				Capital				Deficit				Stock				Equity
Balance at October 1, 2013		52,283			$	53			$	35,111			$	(4,853)			$	(480)			$	29,831
Options issued to employees and directors		—				—				52				—				—				52
Common stock issued to directors		26				—				112				—				—				112
Common stock issued for exercise of  stock options and warrants		505				—				531				—				—				531
Income tax benefit related to exercise of stock options		—				—				171				—				—				171
Net income		—				—				—				3,733				—				3,733
Cash dividends declared, $0.06 per share		—				—				—				(3,156)				—				(3,156)
Balance at March 31, 2014		52,814			$	53			$	35,977			$	(4,276)			$	(480)			$	31,274

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

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Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the six months ended March 31, 2014 and 2013
(Unaudited)
(in thousands)

		Six Months Ended
		March 31,
		2014				2013
Cash flow from operating activities:
Net Income		$	3,733			$	2,772
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,003				4,708
Equity based compensation			164				47
Provision for doubtful accounts and contractual adjustments			1,804				2,479
Deferred income taxes			713				1,476
Reserve for inventory obsolescence			19				103
Changes in operating assets and liabilities:
Accounts receivable			(3,114)				(948)
Deferred advertising			(7,030)				(4,940)
Inventory			(142)				227
Other assets			(284)				(164)
Income taxes prepaid and payable			(1,958)				260
Accounts payable			824				(2,084)
Accrued liabilities			109				135
Other liabilities			(15)				(1)
Net Cash Flow Provided by (Used in) Operating Activities			(174)				4,070
Cash flow from investing activities:
Purchase of property and equipment			(75)				(347)
Proceeds from sale of property and equipment			4				—
Acquisition of business			(134)				—
Net Cash Flow Used in Investing Activities			(205)				(347)
Cash flow from financing activities:
Proceeds from employee stock purchase plan			—				42
Proceeds from exercise of stock options and warrants			531				—
Cash dividends paid			(3,141)				—
Costs associated with credit line facility			(21)				(21)
Income tax benefit related to exercise of stock options			171				—
Payments of capital lease obligations			(41)				(35)
Net Cash Flow Used in Financing Activities			(2,501)				(14)
Net increase (decrease) in cash			(2,880)				3,709
Cash at beginning of period			12,453				3,326
Cash at end of period		$	9,573			$	7,035
Supplemental disclosure of cash flow information:
Cash paid for interest		$	27			$	42
Cash paid for income taxes		$	3,411			$	47
Supplemental schedule of non-cash financing activities:
Cash dividends declared, but not yet paid		$	1,584			$	—

 

See accompanying notes to unaudited condensed consolidated financial statements

6

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 Liberator Medical Holdings, Inc. and Subsidiaries

 

Notes To The Condensed Consolidated Financial Statements

March 31, 2014

 

Note 1 — Interim Financial Statements

 

The accompanying unaudited condensed consolidated financial statements of Liberator Medical Holdings, Inc. (the “Company”) and the notes thereto have been prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. However, in the opinion of the Company, such information includes all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, that was filed with the SEC on December 23, 2013. The results of operations for the six months ended March 31, 2014, are not necessarily indicative of the results to be expected for the full year.

 

The unaudited condensed consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education, Inc., Liberator Health and Wellness, Inc., Practica Medical Manufacturing, Inc., and Tri-County Medical & Ostomy Supplies, Inc., its wholly-owned subsidiaries.

In January 2014, the Company acquired certain assets of a urology division, including the urology customer records, websites, and inventory, of a durable medical equipment business for a cash purchase price of $170,000, of which $134,000 was paid during the three months ended March 31, 2014. The acquisition was immaterial to the Company's consolidated financial position and results of operations.

Note 2 — Summary of Significant Accounting Policies

 

The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013. There were no material changes to our significant accounting policies during the interim period ended March 31, 2014.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying condensed consolidated financial statements in order to maintain consistency and comparability between the periods presented.  The following reclassification was made to the Condensed Consolidated Statement of Cash Flows for the six months ended March 31, 2013, to be consistent with the Condensed Consolidated Statement of Cash Flows for the six months ended March 31, 2014, presented:

·

In the Cash flow from operating activities section, within the Changes in operating assets and liabilities section, $260,000 was reclassified from Accrued liabilities to Income taxes prepaid and payable.

The reclassification had no impact on previously reported net cash flows from operating activities, total assets, stockholders’ equity, or net income.

Note 3 — Credit Line Facility

 

On February 11, 2011, the Company entered into a Committed Line of Credit agreement (the “PNC Credit Line Facility”) with PNC Bank, National Association ("PNC"). Pursuant to the PNC Credit Line Facility, PNC will provide a maximum of $8,500,000 of revolving credit secured by the Company’s personal property, including inventory and accounts receivable. Advances under the PNC Credit Line Facility are subject to a Borrowing Base Rider, which establishes a maximum percentage amount of the Company’s accounts receivable and inventory that can constitute the permitted borrowing base.

On February 27, 2014, PNC Credit Line Facility was amended as follows:

·

The expiration date for the PNC Credit Line Facility was extended from February 11, 2015, to March 31, 2016.

·

The interest rate on the outstanding balance was reduced from LIBOR plus 2.75% to LIBOR plus 2.50%.

7

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·

The EBITDA (earnings before interest, taxes, depreciation and amortization) definition was revised to subtract the actual cash outlay for deferred advertising as stated on the Consolidated Statement of Cash Flows.

 

·

The value of an acquisition requiring PNC's prior written consent was increased to $1,500,000.

The PNC Credit Line Facility requires the Company to comply with certain covenants, including financial covenants which are defined in the credit agreement. As of March 31, 2014, these financial covenants included:

·

The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a ratio of Senior Funded Debt to EBITDA of less than 2.0 to 1; and

·

The Company will maintain as of the end of each fiscal quarter, on a rolling four quarter basis, a Fixed Charge Coverage Ratio of at least 1.25 to 1.

As of March 31, 2014, the Company was in compliance with the applicable financial covenants pursuant to the PNC Credit Line Facility. As of March 31, 2014, availability under the PNC Credit Line Facility was $5,613,000 with an outstanding balance of $1,500,000.  The interest rate for the outstanding balance as of March 31, 2014, was 2.65%. For the six months ended March 31, 2014 and 2013, the Company incurred $22,000 and $37,000, respectively, in interest expense related to the outstanding balances pursuant to the PNC Credit Line Facility.

Note 4 — Stockholders’ Equity

Warrants

 

A summary of warrants issued, exercised, and expired during the six months ended March 31, 2014, is as follows:

 

						Weighted
						Avg.
						Exercise
Warrants:		Shares				Price
Balance at October 1, 2013			233,333			$	2.50
Issued			—				—
Exercised			(29,167)				2.50
Expired			—				—
Balance at March 31, 2014			204,166			$	2.50

 

Employee and Director Stock Options

 

The Company granted 150,000 and 370,000 options during the six months ended March 31, 2014 and 2013, respectively.  The weighted-average grant date fair value of options granted during the six months ended March 31, 2014 and 2013, respectively, was $0.50 and $0.29 per share.  There were 475,084 options exercised during the six months ended March 31, 2014, and none exercised during the six months ended March 31, 2013. The total intrinsic value of options exercised during the six months ended March 31, 2014 was approximately $1,385,000.

The fair values of stock-based awards granted during the six months ended March 31, 2014 and 2013, were calculated with the following weighted-average assumptions:

		2014			2013
Risk-free interest rate:			0.68%		0.40%
Expected term:			2.99 years		2.91 years
Expected dividend yield:			5.60%		0.00%
Expected volatility:			48.34%		46.87%

  For the six months ended March 31, 2014 and 2013, the Company recorded $52,000 and $34,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits, for the employees and General and administrative for the directors. As of March 31, 2014, there is $68,000 in total unrecognized compensation expense related to non-vested employee options and director stock options granted, which is expected to be recognized over 1.5 years.

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Stock option activity for the six months ended March 31, 2014, is summarized as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
2007 Stock Plan:		Shares				Price				Life (Years)				Value
Options outstanding at October 1, 2013			1,450,500			$	1.07				1.98			$	1,401,445
Granted			150,000				2.15
Exercised			(475,084)				0.97
Expired or forfeited			(20,000)				0.60
Options outstanding at March 31, 2014			1,105,416			$	1.28				2.10			$	2,934,748
Options exercisable at March 31, 2014			879,166			$	1.20				1.57			$	2,399,648
Options vested or expected to vest at March 31, 2014			1,105,416			$	1.28				2.10			$	2,934,748

 

 Director Stock Grants

In January 2014, the two independent members of the Company's Board of Directors were issued 25,974 common shares of restricted stock grants for compensation. For the three months ended March 31, 2014, the Company recorded $112,000 of stock-based compensation expense associated with the stock grants.     

Note 5 — Basic and Diluted Earnings per Common Share

 

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the three and six months ended March 31, 2014 and 2013 (in thousands, except per share amounts):

 

		For the three months								For the six months
		ended March 31,								ended March 31,
		2014				2013				2014				2013
Numerator:
Net income — basic		$	1,613			$	1,420			$	3,733			$	2,772
Denominator:
Weighted average shares outstanding — basic			52,578				48,177				52,467				48,162
Effect of dilutive securities:
Stock options and warrants			1,024				4,100				983				4,052
Weighted average shares outstanding — diluted			53,602				52,277				53,450				52,214
Earnings per share — basic		$	0.03			$	0.03			$	0.07			$	0.06
Earnings per share — diluted		$	0.03			$	0.03			$	0.07			$	0.05

 

The following table summarizes the number of weighted shares outstanding for each of the periods presented, but not included in the calculation of diluted income per share because the impact would have been anti-dilutive for the three and/or six months ended March 31, 2014 and 2013 (in thousands):

		For the three months								For the six months
Anti-dilutive shares (000’s):		ended March 31,								ended March 31,
		2014				2013				2014				2013
Stock options			—				1,440				—				1,540
Warrants			—				5,044				—				5,044
			—				6,484				—				6,584

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Note 6 — Income Taxes

 

The provision for income taxes was $2,338,000 for the six months ended March 31, 2014. The effective tax rate was approximately 39% of the income before income taxes of $6,071,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

 

The provision for income taxes was $1,802,000 for the six months ended March 31, 2013. The effective tax rate was approximately 39% of the income before income taxes of $4,574,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. When used in this Quarterly Report, in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date made. Various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of distributing or marketing activities, competitive and regulatory factors, and additional factors set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2013, under the caption “Risk Factors,” could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated by any forward-looking statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial statements of the Company included in our Annual Report on Form 10-K for the year ended September 30, 2013, and management’s discussion and analysis contained therein. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

Business Overview

Liberator Medical Supply, Inc. (“Liberator Medical”), a wholly-owned subsidiary of the Company, is a leading, federally licensed, national direct-to-consumer provider of quality medical supplies to Medicare-eligible seniors. Accredited by The Joint Commission, our Company’s unique combination of marketing, industry expertise and customer service has demonstrated success over a broad spectrum of chronic conditions. Liberator is recognized for offering a simple, reliable way to purchase medical supplies needed by our patients on a recurring basis, generally on a continual basis for a lifetime, with the convenience of direct billing to Medicare and private insurance. Liberator’s revenue primarily comes from supplying urological, ostomy, and diabetic medical supplies and mastectomy fashions. Customers may purchase by phone, mail, or the Internet; repeat orders are confirmed with the customer and shipped when needed.

We market our products directly to consumers through our direct response advertising efforts. We target consumers with chronic conditions who require a continuous supply of medical products that we can provide at attractive gross margins. Our advertising efforts do not represent an effort to target new markets or sell new products, but are a continuation of our efforts to acquire new customers in the markets we currently serve. We also generate new customers through referrals as a result of our regular communication with doctors’ offices, home health organizations, vendors, and existing customers.

We receive initial contact from prospective customers in the form of leads. A certain number of leads are then qualified and become new customers. Our qualification efforts primarily involve verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining our billing and collection processes, if applicable. The majority of the new customers qualified from our process typically place their initial order with us within three to six months from the time we receive initial contact from the customer. Since our inception, we have demonstrated our ability to attract and retain customers with our unique customer service that generates an annuity-like revenue stream that can last for periods of greater than ten years.

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The following table shows our revenue streams, including new and recurring orders, for the three and six  months ended March 31, 2014 and 2013, based on the fiscal year that we received the initial lead from these customers (dollars in thousands):

New and recurring revenues generated from customer leads received during:		For the three months ended March 31,							For the six months ended March 31,
		2014				2013			2014				2013
Pre-FY 2009		$	2,448			$	2,734		$	5,126			$	5,687
FY 2009			2,734				3,095			5,646				6,374
FY 2010			2,507				2,905			5,227				5,991
FY 2011			2,623				3,116			5,682				6,481
FY 2012			2,755				3,259			5,896				7,157
FY 2013			2,529				1,725			5,535				2,735
FY 2014			1,832				n/a			2,714				n/a
Total Revenues *		$	17,428			$	16,834		$	35,826			$	34,425
Other Sales and Adjustments			191				(100)			430				(140)
Net Sales		$	17,619			$	16,734		$	36,256			$	34,285
* Revenues include orders from new and recurring customers, net of contractual allowances. Revenue from new customers will impact comparisons between the periods for fiscal year 2014 and the corresponding periods from fiscal year 2013, especially revenue from new customers acquired during the latter portion of the fiscal years.

We believe the recurring nature of our customer base helps provide a long-term stable cash flow. We are able to adjust our advertising spend relatively quickly to respond to changing market conditions, favorable or unfavorable, which helps control our operating cash flows. As our customer base grows and revenues increase, we continue to focus on improving operational efficiencies to increase profitability.

Results of Operations

 

The following table summarizes the results of operations for the three and six months ended March 31, 2014 and 2013, including percentage of sales (dollars in thousands):

 

		For the three months ended March 31,																For the six months ended March 31,
		2014								2013								2014								2013
		Amount				%				Amount				%				Amount				%				Amount				%
Net Sales		$	17,619				100.0			$	16,734				100.0			$	36,256				100.0			$	34,285				100.0
Cost of Sales			6,611				37.5				6,000				35.9				13,493				37.2				12,574				36.7
Gross Profit			11,008				62.5				10,734				64.1				22,763				62.8				21,711				63.3
Operating Expenses			8,411				47.7				8,376				50.0				16,666				46.0				17,095				49.9
Income from Operations			2,597				14.8				2,358				14.1				6,097				16.8				4,616				13.4
Other Expenses			(13)				(0.1)				(21)				(0.1)				(26)				(0.1)				(42)				(0.1)
Income before Income Taxes			2,584				14.7				2,337				14.0				6,071				16.7				4,574				13.3
Provision for Income Taxes			971				5.5				917				5.5				2,338				6.4				1,802				5.2
Net Income		$	1,613				9.2			$	1,420				8.5			$	3,733				10.3			$	2,772				8.1

Revenues

 

Net sales for the three months ended March 31, 2014, increased by $885,000, or 5.3%, to $17,619,000, compared with net sales of $16,734,000 for the three months ended March 31, 2013. Net sales for the six months ended March 31, 2014, increased by $1,971,000, or 5.7%, to $36,256,000, compared with net sales of $34,285,000 for the six months ended March 31, 2013. The increase in net sales was primarily due to our continued emphasis on our direct response advertising campaign to acquire new customers and our emphasis on customer service to maximize the reorder rates for our recurring customer base.

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Our direct-response advertising expenditures for the three months ended March 31, 2014, were $4,112,000 compared with $2,187,000 for the three months ended March 31, 2013. We acquired 3,231 and 2,916 new customers during the three months ended March 31, 2014 and 2013, respectively.

Our direct-response advertising expenditures for the six months ended March 31, 2014, were $7,030,000 compared with $4,940,000 for the six months ended March 31, 2013. We acquired 6,060 and 6,824 new customers during the six months ended March 31, 2014 and 2013, respectively.

The following table summarizes the revenues generated from our new customers and our recurring customer base for the three and six months ended March 31, 2014 and 2013 (dollars in thousands):

Revenues generated by:		For the three months ended March 31,							For the six months ended March 31,
		2014				2013			2014				2013
New Customers (1)		$	2,379			$	2,524		$	4,049			$	4,508
Recurring Customer Base			15,049				14,310			31,777				29,917
Total Revenues, net of contractual adjustments		$	17,428			$	16,834		$	35,826			$	34,425
Other Sales and Adjustments			191				(100)			430				(140)
Net Sales		$	17,619			$	16,734		$	36,256			$	34,285
(1) For the six months ended March 31, 2014, $2,714 of the net sales for new customers acquired was generated from leads received during the six months ended March 31, 2014. For the six months ended March 31, 2013, $2,735 of the net sales for new customers acquired was generated from leads received during the six months ended March 31, 2013. The remaining net sales from new customers acquired were generated from leads received during prior periods.

We obtain the majority of our new customers from leads generated by direct responses to our advertising. The number of new customers acquired through our advertising is dependent on internal and external factors, including, but not limited to, the timing of our advertising spend, the length of time from the receipt of the customer leads, the level of responses to our advertising efforts, our ability to convert leads to customers, and the market environment.  

During the first two quarters of fiscal year 2014, we increased our advertising expenditures to build our customer lead base.

 

The following table shows the number of new customer leads generated from our quarterly advertising expenditures over the last six quarters:

Quarter		Advertising Spend ($000's)			Number of Customer Leads
FY2014-Q2 (1)		$	4,282		16,943
FY2014-Q1			2,918		14,206
FY2013-Q4 (2)			2,367		12,461
FY2013-Q3			2,036		11,220
FY2013-Q2			2,187		11,905
FY2013-Q1		$	2,753		15,451
(1) Includes $170,000 for an acquisition of a small urological division completed in January 2014. (2) Includes $343,000 for an acquisition of a small ostomy supply business completed in July 2013.

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The following table shows the timing of the new customers acquired based on the quarter the customer leads were initially received:

Customer Leads Received		Number of New Customers Acquired (1)
		FY2014-Q2		FY2014-Q1		FY2013-Q4		FY2013-Q3		FY2013-Q2		FY2013-Q1
FY2014-Q2		2,077
FY2014-Q1		626		1,688
FY2013-Q4		112		607		1,978
FY2013-Q3		39		66		542		1,669
FY2013-Q2		32		65		86		634		1,713
FY2013-Q1		50		45		64		109		570		2,108
Pre-FY2013		295		358		355		491		633		1,800
Total New Customers		3,231		2,829		3,025		2,903		2,916		3,908
(1) The number of new customers acquired in a particular quarter are derived from leads received in the current quarter and from leads received in preceding quarters. During the second quarter of fiscal year 2014, we acquired 3,231 new customers, of which 2,077 new customers were from leads received in the same quarter and 1,154 new customers were from leads received in prior quarters.

The majority of the new customers acquired place their initial order with us within three to six months following our advertising expenditures. However, we generate new customers directly from the customer leads received from a particular quarter's advertising spend beyond six months, primarily due to delays in reconnecting with the prospective customers after the initial contact and obtaining the proper documentation from the customers and/or their physicians. We expect to continue to acquire new customers over the next fifteen to eighteen months from our increased customer lead base. Similar to our past direct-response advertising efforts, when we increased our advertising spend, our costs to acquire new customers increased. We believe that the incremental costs associated with acquiring new customers through our increased advertising expenditures will be more than offset by the recurring revenues generated from the new customers acquired as a result of our advertising efforts.

Gross Profit

 

Gross profit for the three months ended March 31, 2014, increased by $274,000, or 2.6%, to $11,008,000, compared with gross profit of $10,734,000 for the three months ended March 31, 2013. For the six months ended March 31, 2014, gross profit increased by $1,052,000, or 4.8%, to $22,763,000, compared with gross profit of $21,711,000. The increase was attributed to our increased sales volume for the three and six months ended March 31, 2014, compared with the three and six months ended March 31, 2013.

 

As a percentage of sales, gross profit decreased by 1.6% and 0.5%, respectively, for the three and six months ended March 31, 2014, compared with the three and six months ended March 31, 2013.  The decrease in gross profit as a percentage of sales was primarily attributable to an increase in our product mix towards ostomy supplies, partially offset by a reduction in product costs from one of our suppliers beginning in November 2013.

 

Operating Expenses

 

The following table provides a breakdown of our operating expenses for the three and six months ended March 31, 2014 and 2013, including percentage of sales (dollars in thousands):

		For the three months ended March 31,																For the six months ended March 31,
		2014								2013								2014								2013
		Amount				%				Amount				%				Amount				%				Amount				%
Operating Expenses:
Payroll, taxes, and benefits		$	3,681				20.9			$	3,666				21.9			$	7,338				20.2			$	7,509				21.9
Advertising			2,371				13.5				2,269				13.6				4,697				13.0				4,471				13.0
Bad debts			818				4.6				1,167				7.0				1,642				4.5				2,445				7.0
Depreciation and amortization			168				1.0				174				1.0				339				0.9				338				1.0
General and administrative			1,373				7.8				1,100				6.6				2,650				7.3				2,332				6.8
Total Operating Expenses		$	8,411				47.7			$	8,376				50.1			$	16,666				46.0			$	17,095				49.8

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Payroll, taxes and benefits increased by $15,000, or 0.4%, to $3,681,000 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Payroll, taxes and benefits decreased by $171,000, or 2.3%, to $7,338,000 for the six months ended March 31, 2014, compared with the six months ended March 31, 2013. The increase for the three months ended March 31, 2014, was due to fluctuations in number of employees to support our increased sales volume. The decrease for the six months ended March 31, 2014, was the result of process and system enhancements implemented over the past year. As of March 31, 2014, we had 320 active employees, compared with 318 at March 31, 2013.

  

Advertising expenses increased by $102,000, or 4.5%, to $2,371,000 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. For the six months ended March 31, 2014, advertising expenses increased by $226,000, or 5.1%, to $4,697,000, compared with the six months ended March 31, 2013.

The majority of our advertising expense is associated with the amortization of previously capitalized direct response advertising costs. The balance of our advertising expense is for costs that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our advertising expense for the three and six months ended March 31, 2014 and 2013 (dollars in thousands):

 

		For the three months Ended March 31,								For the six months Ended March 31,
		2014				2013				2014				2013
Advertising Expense:
Amortization of direct-response costs		$	2,353			$	2,223			$	4,664			$	4,370
Other advertising expenses			18				46				33				101
Total Advertising Expense		$	2,371			$	2,269			$	4,697			$	4,471

Direct response advertising costs are accumulated into quarterly cost pools and amortized separately. The amortization is the amount computed using the ratio that current period revenues for each direct-response advertising cost pool bear to the total of current and estimated future benefits for that direct response advertising cost pool. We have persuasive evidence that demonstrates future benefits are realized from our direct response advertising efforts beyond four years. Since the reliability of accounting estimates decreases as the length of the period for which such estimates are made increases, we estimate future benefits for each advertising cost pool for a period of no longer than four years at each reporting period, which creates a “rolling” type amortization period. Once a particular cost pool has been amortized to a level where the difference between amortizing the cost pool over a “rolling” four-year period and amortizing the cost pool on a “straight-line” basis over a period shorter than four years is de minimis, we amortize the costs over a fixed time period based on current and expected future revenues. As a result of this policy, our direct response advertising costs are amortized over a period of approximately six years based on probable future net revenues updated at each reporting period.

The table below shows our historical direct response advertising spend and a breakdown of the amortization expense associated with the respective accumulated advertising cost pools for the six months ended March 31, 2014 and 2013. For presentation purposes, the quarterly advertising cost pools prior to fiscal year 2013 have been aggregated into fiscal years (dollars in thousands):

Actual Advertising Spend			Grouped by Fiscal or Interim Period		Amortization Expense for the six months ended March 31,							Deferred Advertising  Balance @ 3/31/2014
					2014				2013
$	1,567		FY2008		$	—			$	19		$	—
	4,191		FY2009			78				126			104
	10,808		FY2010			502				682			1,340
	15,245		FY2011			1,080				1,321			4,342
	13,113		FY2012			1,191				1,646			6,680
	2,753		FY2013-Q1			281				417			1,737
	2,187		FY2013-Q2			241				159			1,497
	2,036		FY2013-Q3			243				—			1,505
	2,024		FY2013-Q4			287				—			1,596
	2,918		FY2014-Q1			457				—			2,461
	4,112		FY2014-Q2			304				—			3,808
	Total Amortization Expense				$	4,664			$	4,370		$	25,070

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Bad debt expenses decreased by $349,000, or 29.9%, to $818,000 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. For the six months ended March 31, 2014, bad debt expenses decreased by $803,000, or 32.8%, compared with the six months ended March 31, 2013.  The decrease in bad debt expense was due to increased accounts receivable collection efforts.  Over the last eighteen months, we have implemented improvements to our billing and collection processes and increased the number of employees in our accounts receivable department. As a result of these efforts, the number of days outstanding of gross accounts receivables, excluding receivables delayed due to Medicare audits, decreased by 7.4 days to 63.5 days as of March 31, 2014, compared with 70.9 days as of March 31, 2013, which reduced our bad debt reserve requirements for the six months ended March 31, 2014, compared with the six months ended March 31, 2013.

 

Depreciation and amortization expenses decreased by $6,000, or 3.5%, to $168,000 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. For the six months ended March 31, 2014, depreciation and amortization expense increased by $1,000, or 0.3%, to $339,000 compared with the six months ended March 31, 2013.  

Purchases of property and equipment totaled $75,000 and $347,000 during the six months ended March 31, 2014 and 2013, respectively.

 

General and administrative expenses increased by $273,000, or 24.8%, to $1,373,000 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. For the six months ended March 31, 2014, general and administrative expenses increased by $318,000, or 13.6%, compared with the six months ended March 31, 2013. The increase is due to increases in professional and director’s fees, partially offset by reduced software support costs.

 

Income from Operations

 

Income from operations for the three months ended March 31, 2014, increased by $239,000, or 10.1%, to $2,597,000, compared with the three months ended March 31, 2013. For the six months ended March 31, 2014, income from operations increased by $1,481,000, or 32.1%, to $6,097,000, compared with the six months ended March 31, 2013. The increase in operating income is primarily attributed to increased gross profits driven by our increased sales volumes as well as a reduction as a percentage of sales in payroll and bad debts expense, partially offset by an increase in general and administrative expenses.

 

Other Expenses

 

The following table shows a breakdown of other expenses for the three and six months ended March 31, 2014 and 2013 (dollars in thousands):

 

		For the three months Ended March 31,								For the six months Ended March 31,
		2014				2013				2014				2013
Other Expenses:
Interest expense		$	(13)			$	(21)			$	(25)			$	(42)
Loss on sale of assets			—				—				(1)				—
Total Other Expenses		$	(13)			$	(21)			$	(26)			$	(42)

Interest expense decreased by $8,000 and $17,000, respectively, for the three and six months ended March 31, 2014, compared with the three and six months ended March 31, 2013, due to a reduction of $1.0 million in borrowings under our credit line facility. The outstanding borrowings under our credit line facility were $1.5 million during the six months ended March 31, 2014, compared with outstanding borrowings of $2.5 million under our credit line facility during the six months ended March 31, 2013.

 

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 Income Taxes

 

The following table provides a breakdown of our income tax expenses for the three and six months ended March 31, 2014 and 2013 (dollars in thousands):

		For the three months								For the six months
		ended March 31,								ended March 31,
		2014				2013				2014				2013
Current income tax expense:
Federal		$	111			$	193			$	1,373			$	239
State			27				53				251				87
Total current income tax expenses			138				246				1,624				326
Deferred income tax expense:
Federal			712				582				608				1,284
State			121				89				106				192
Total deferred income tax expense			833				671				714				1,476
Provision for income taxes		$	971			$	917			$	2,338			$	1,802

Our taxable income for fiscal year 2013 exceeded our net operating loss carry-forwards from fiscal year 2012, and substantially all of our net operating loss carry-forwards were utilized to reduce our federal and state income tax liabilities for fiscal year 2013. As a result, our income tax expense for the six months ended March 31, 2014, consisted of a larger proportion of current income tax expense versus deferred income expense (income) compared with the six months ended March 31, 2013.

During the six months ended March 31, 2014, we paid $3,411,000 in estimated federal and state income taxes related to taxable income for fiscal year 2013 and estimated taxable income for the six months ended March 31, 2014. Based on our actual results for the six months ended March 31, 2014, primarily driven by our increased advertising spend and additional tax benefits realized as a result of the exercise of options and warrants during the period, we overpaid our estimated federal and state income taxes by approximately $944,000, which will reduce our estimated federal and state income tax payments due during the third quarter of fiscal year 2014.  

The following table provides a breakdown of our income tax assets and liabilities by current and deferred as of March 31, 2014, and September 30, 2013 (dollars in thousands):

		As of March 31, 2014				As of September 30, 2013
Current income tax liabilities and prepaid income taxes:
Current income tax liabilities		$	181			$	1,195
Less: Prepaid income taxes			(944)				—
Net current income tax liabilities (prepaid income taxes)		$	(763)			$	1,195
Deferred income tax liabilities:
Deferred tax liability		$	9,338			$	8,561
Less: Deferred tax assets, current portion			(2,131)				(2,067)
Net deferred tax liabilities		$	7,207			$	6,494

The provision for income taxes was $2,338,000 for the six months ended March 31, 2014.  The effective tax rate was approximately 39% of the income before income taxes of $6,071,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

The provision for income taxes was $1,802,000 for the six months ended March 31, 2013. The effective tax rate was approximately 39% of the income before income taxes of $4,574,000, which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s expenses that are not deductible for tax purposes.

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Liquidity and Capital Resources

 

The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended March 31, 2014 and 2013 (dollars in thousands): 

		For the Six Months Ended
		March 31,
		2014				2013
Cash Flows:
Net cash provided by (used in) operating activities		$	(174)			$	4,070
Net cash used in investing activities			(205)				(347)
Net cash used in financing activities			(2,501)				(14)
Net increase (decrease) in cash			(2,880)				3,709
Cash at beginning of period			12,453				3,326
Cash at end of period		$	9,573			$	7,035

The Company had cash of $9,573,000 at March 31, 2014, compared with cash of $12,453,000 at September 30, 2013, a decrease of $2,880,000. The decrease in cash for the six months ended March 31, 2014, was primarily due to $2,501,000 of cash used in financing activities, $205,000 of cash used in investing activities and $174,000 of cash used in operating activities.

Operating Activities

 

Cash used in operating activities was $174,000 for the six months ended March 31, 2014, which represents a decrease of $4,244,000 compared with cash provided by operating activities of $4,070,000 for the six months ended March 31, 2013. The decrease in operating cash flows for the six months ended March 31, 2014, was the result of an increase in income tax payments of $3,364,000 and an increase in direct-response advertising spend of $2,090,000, partially offset by an increase in net income of $961,000 and $249,000 in changes in other assets and liabilities and non-cash expenses.    

Currently, Regions C and D of Medicare are conducting pre-payment audits for catheter claims submitted by all suppliers. In January 2014, Region C temporarily decreased the level of prepayment audits for catheter claims. However, in March 2014 Region C re-initiated the prepayment audits for catheter claims. The results of these audits have not generated a significant number of denials and/or adjustments, and based on our historical experience we expect to receive payment for most of these claims from Medicare. However, we have experienced a delay of up to 45 to 90 days in receiving payments for these Medicare claims. As of March 31, 2014, we had approximately $1,150,000 of Medicare claims delayed due to pre-payment audits by all Medicare regions.

In addition to the Medicare pre-payment audits for catheter claims, Medicare is experiencing a delay in Administrative Law Judge ("ALJ") Hearings for Medicare appeals, which has increased the amount of Medicare claims we have pending for the ALJ appeals process. As of March 31, 2014, we had approximately $220,000 of Medicare claims delayed due to the delay in the Medicare ALJ appeals process.

Due to the increase in Medicare pre-payment audits and the delay in the Medicare ALJ appeals process, the number of days of gross accounts receivable outstanding increased by 6.5 days to 70.5 as of March 31, 2014, compared with 64.1 days outstanding as of September 30, 2013.

Investing Activities

 

During the six months ended March 31, 2014 and 2013, we purchased $75,000 and $347,000, respectively, of property and equipment to support our continued growth. The $75,000 of purchases during the six months ended March 31, 2014, was for computer equipment, website enhancements, and other software.  The $347,000 of purchases during the six months ended March 31, 2013, was for leasehold improvements and computer equipment related to the build-out of a 6,400 square-foot facility, which was completed in January 2013.

 

Financing Activities

 

During the six months ended March 31, 2014, cash used in financing activities was $2,501,000, which included cash dividends paid of $3,141,000, payments of $41,000 for capital lease obligations, and payments of $21,000 for costs associated with the extension of our PNC Credit Line Facility, partially offset by $531,000 of proceeds received from the exercise of stock options and warrants, and $171,000 of income tax benefits related to the exercise of certain non-qualified stock options.

 

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During the six months ended March 31, 2013, cash used in financing activities was $14,000, which included $42,000 of proceeds from our employee stock purchase plan, offset by payments of $21,000 for costs associated with the extension of our PNC Credit Line Facility and payments of $35,000 toward capital lease obligations.

 

Outlook

 

We have increased sales by $2.0 million, or 5.8%, to $36.3 million for the six months ended March 31, 2014, compared with sales of $34.3 million for the six months ended March 31, 2013. Our operating income increased by $1.5 million, or 32.1%, to $6.1 million for the six months ended March 31, 2014, compared with operating income of $4.6 million for the six months ended March 31, 2013. Our operating margins improved from 13.5% to 16.8% during the same periods.

During the six months ended March 31, 2014, we increased the levels of our direct response advertising spend to take advantage of market opportunities, build our customer lead base, and increase the number of new customers acquired during the current period and in future periods. We continue to explore potential acquisition targets during fiscal year 2014 that would allow us to acquire new customers at competitive rates. We will manage the levels of our direct response advertising spend based on market opportunities, the status of potential acquisition targets, if applicable, and future cash flows for fiscal year 2014.

As of March 31, 2014, we had $9.6 million of cash and $5.6 million available from our credit line facility to fund our operations. We believe that the existing cash and the availability of funds through our credit line, together with cash generated from operations, will be sufficient to meet our cash requirements during the next twelve months.

At March 31, 2014, our current assets of $24,662,000 exceeded our current liabilities of $9,089,000 by $15,573,000.

We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider, primarily focused on supplying medical supplies to chronically ill patients

 

Off-Balance Sheet Arrangements

 

As of March 31, 2014, we had no off-balance sheet arrangements.

 

Critical Accounting Policies

 

See “Summary of Significant Accounting Policies” in the Notes to the unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended September 30, 2013, for a discussion of significant accounting policies, recent accounting pronouncements, and their effect, if any, on the Company.

Effect of Inflation

 

We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past two years.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2014. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2014.

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Change in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the six months ended March 31, 2014, the Company issued 504,251 shares of common stock upon the exercise of outstanding options and warrants for gross proceeds of $531,456. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

 During the six months ended March 31, 2014, the Company issued 25,974 shares of common stock pursuant to a restricted stock grant issued to non-executive members of the Board of Directors. The securities were issued in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended. 

Item 3. Defaults Upon Senior Securities

 

None.

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit 31.1 — Section 302 Certificate of Chief Executive Officer
Exhibit 31.2 — Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 — Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 — Section 906 Certificate of Chief Financial Officer

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.

 

/s/ LIBERATOR MEDICAL HOLDINGS, INC.

 

Registrant

 

/s/ Mark A. Libratore		President		May 15, 2014
Mark A. Libratore
/s/ Robert J. Davis		Chief Financial Officer		May 15, 2014
Robert J. Davis

 

 

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